Housing Crash Fades as Defaults Decline to 2007 Levels

May 6 (Bloomberg) -- Six years after the start of the
foreclosure crisis, American homeowners are paying their
mortgages like the housing crash never happened.

First-time delinquent home loans fell to 0.84 percent of
the 50.2 million mortgages in March, the first month below 1
percent since 2007, before a wave of defaults led to the
financial crisis, according to a report today by Lender
Processing Services Inc. The rate of first-time defaults,
defined as loans that went from performing to at least 60 days
delinquent, peaked at 2.89 percent in January 2009.

The decline in new problem loans shows that the recovering
U.S. economy, falling unemployment and rising home prices,
combined with more than four years of banks’ tightening lending
standards, are propelling the worst real estate crash since the
Great Depression into the rearview mirror.

“Mortgage quality is improving rapidly,” Mark Zandi,
chief economist for Moody’s Analytics Inc. said in a telephone
interview from his office in West Chester, Pennsylvania. “Once
we’re able to work through this last bulge of foreclosed
property, which I think we’ll be able to do over the next 18 to
24 months, mortgage credit quality is going to look absolutely
beautiful.”

Mortgages at least 30 days delinquent or in some stage of
foreclosure fell to 5 million in March, down from a peak of 7.7
million in January 2010, according to Lender Processing
Services, a real estate information service based in
Jacksonville, Florida. That’s still more than double the 2.2
million non-current mortgages of January 2005, when the housing
market was rising toward its peak.

Lending Standards

Tight lending standards have made it harder for borrowers
to obtain mortgages, helping drive down default rates while
reducing the homeownership rate in the first quarter to 65
percent, the lowest since 1995.

The Federal Housing Administration, which offers loans to
buyers with downpayments as low as 3.5 percent, has steadily
raised its credit scores. In the third quarter of 2012, the most
recent available, 97 percent of FHA borrowers had credit scores
above 620 of a possible 850. In the last quarter of 2006, only
53 percent had a score above 620.

New mortgage default rates are highest among so-called
“underwater” borrowers, who have negative equity because they
owe more on their home than the balance of their loan, said Herb
Blecher, senior vice president at LPS Applied Analytics.

The new default rate was 4 percent for borrowers who owe at
least 50 percent more than the value of their home compared with
0.6 percent for owners with equity, according to today’s report.

Negative Equity

The number of home loans with negative equity fell to about
9 million or 18 percent of homes with a mortgage in January, the
report said. That’s down 41 percent from a year earlier and 47
percent lower than the peak of 17 million loans in February
2011.

U.S. home prices climbed at the fastest pace since May
2006, rising 9.3 percent in February from a year earlier,
according to an April 30 report by the S&P/Case-Shiller index of
property values.

There’s a “feeding frenzy in housing” as Americans seek
to take advantage of prices still about 29 percent below their
2006 peak and mortgage rates near record lows, said Ross Perot
Jr., 54, chairman of Dallas-based real estate company Hillwood
Development Co., in a telephone interview. Perot’s father, H.
Ross Perot, twice ran for president as an independent candidate.

‘Very Shrewd’

“The big picture: this economy is coming back,” Perot
said during a telephone interview from Newport Beach,
California, where he was breaking ground on a condo project
backed by his Dallas-based company. “The American people are
very shrewd and they realize it’s a great time to borrow to buy
a home because pricing is very cheap.”

The average rate for a 30-year fixed mortgage dropped to
3.35 percent last week, down from 3.84 percent a year ago as the
Federal Reserve has bought $85 billion of bonds to stimulate the
economy. The average 15-year rate is a record low 2.56 percent.

Demand is also rising as more Americans find jobs. The
unemployment rate fell to 7.5 percent in April, its lowest rate
since December 2008, the Labor Department reported May 3. The
Dow Jones Industrial Average last week rose above 15,000 for the
first time.

As the quality of new mortgages improved, government
regulations have become a barrier limiting lenders’ willingness
to extend credit to more borrowers, David Stevens, chief
executive officer of the Mortgage Bankers Association said
today.

‘Being Rejected’

“Too many families with solid credit who want to buy a
home are being rejected,” Stevens said at a conference in New
York. “Right now, overlapping regulations keep responsible
young families from buying their first home. What’s holding us
back? Let’s streamline the process, and help our economy grow.”

While new defaults have declined, loans that are at least
90 days delinquent account for a growing share of the non-performing mortgage pie: 62 percent this year compared with 30
percent in 2005, according to Lender Processing Services. The
late-stage delinquency loans are increasingly concentrated in
so-called judicial states that require court approval for
foreclosures.

Florida had the highest rate of non-current mortgages with
18.2 percent of loans either delinquent or having received a
foreclosure notice, followed by New Jersey, Mississippi, Nevada
and New York. While Florida’s problem loans declined over the
last year, the number increased 5.8 percent in New Jersey and
6.1 percent in New York. All three are judicial states, where
homes languish in foreclosure more than 1,000 days while waiting
to be repossessed.

“The new problems coming into the system have
alleviated,” Blecher said in a telephone interview. “It’s
really about addressing what’s still in the pipeline.”